Diversifying Across Equity Anomalies
March 16, 2010 - Big Ideas, Strategic Allocation
Is diversification across equity anomalies beneficial? In his December 2009 preliminary paper entitled “Diversification Across Characteristics”, Erik Hjalmarsson combines long-short portfolios formed on seven stock anomalies:
- Short-term (one-month) reversal (ST-R)
- Medium-term (11 months plus skip-month) momentum (Mom)
- Long-term (four years plus skip-year) reversal (LT-R)
- Book-to-market value (B/M)
- Cash flow-to-price ratio (C/P)
- Earnings-to-price ratio (E/P)
- Market capitalization (Size)
The portfolio for each anomaly is long (short) on an equally weighted basis the tenth of stocks expected to generate the most positive (negative) returns, reformed each month. Using monthly firm characteristics and return data for all NYSE, AMEX and NASDAQ stocks over the period July 1951 through December 2008, he finds that: Keep Reading